Category: Short Sales

It’s likely you’ve heard the term “short sale” thrown around quite a bit. What exactly is a short sale?

A short sale is when a bank agrees to accept less than the total amount owed on a mortgage to avoid having to foreclose on the property. This is not a new practice; banks have been doing short sales for years. Only recently, due to the current state of the housing market and economy, has this process become a part of the public consciousness.

To be eligible for a short sale you first have to qualify!

To qualify for a short sale:

Your house must be worth less than you owe on it.

You must be able to prove that you are the victim of a true financial hardship, such as a decrease in wages, job loss, or medical condition that has altered your ability to make the same income as when the loan was originated. Divorce, estate situations, etc… also qualify. There are some exceptions to hardship now, but for the most part the bank or investor will need to verify some type of hardship.

Now that you have a basic understanding of what a short sale is, there are some huge misconceptions when it comes to a short sale vs. a foreclosure. We take the most common myths surrounding both short sales and foreclosures and give a brief explanation. LET’S BUST SOME MYTHS!!

1.) If you let your home go to foreclosure you are done with the situation and you can walk away with a clean slate. The reality is that this couldn’t be any farther from the truth in most situations. You could end up with an IRS tax liability and still owing the bank money. Let me explain. Please keep in mind that if your property does go into foreclosure you may be liable for the difference of what is owed on the property versus what is sells for at auction, in the form of a deficiency balance! Please note this is state specific and in most states you will be liable for the shortfall, but in some states the bank may not always be able to pursue the debt. Check your state law as it varies widely from state to state.

Here is an example of how a deficiency balance works:

If you owe $200,000 on the property and it sells at auction for $150,000, you could be liable for the $50,000 difference if your state law allows it.

Not only could you be liable for the difference to the bank, but in some situations you could also be liable to the IRS! Although there are exemptions (mostly for principle residences) under the Mortgage Debt Forgiveness Act, there are times when you could be taxed on both a short sale and a foreclosure, even in a principle residence situation. Since the tax code on this is a little complicated and I am not a CPA, I advise always talking to a CPA when in this situation as you are weighing your options. Banks and the IRS can go as far as attaching your wages. Not to mention if you let your home go to foreclosure you will have that on your credit, as well.

Guess What? A short sale can alleviate your liability to the bank, in most situations. There are also exceptions to this, but in most cases banks are releasing homeowners from the deficiency balance on a short sale.

2.) There are no options to avoid foreclosure. Now more than ever, there are options to avoid foreclosure. Besides a short sale, loan modifications along with deed in lieu are also examples of the many options. In most cases (but not all) a short sale is the best option. Either way, there are more options today than there have ever been to avoid foreclosure.

3.) Banks do not want to participate in a short sale, or, it is too hard to qualify for a short sale. Banks would rather perform a short sale than a foreclosure any day. A foreclosure takes a long time and creates a huge expense for the banks; a short sale saves both time and money. In working with some of the biggest lenders and servicers in the country they have told me that on average they net 17-25% more on a short sale than on a foreclosure. A testament to this is the financial incentives now being offered by banks, and how much the entire process has recently changed to try and streamline the process for all parties. Banks more than ever welcome short sales. Qualifying for a short sale is easier than you think, you need to have a true financial hardship, or a change in your finances and your house has to be worth less than what you owe on it. Not only do consumers, but banks also now have government incentives to participate in short sales.

4.) Short sales are not that common. At this present time, short sales range from 10-50 % of sales in various markets and it is predicted that in 2013 we will have more short sales than any other year, to date. One of the biggest reasons is that MHA(Making Home Affordable expires December 2013). Many of the Government incentives like HAFA, will expire the end of this year. Due to economic changes in the last few years, this is something that is affecting millions of Americans. Short sales are in every market, and are not just limited to any particular income class. This has affected everyone from all facets of life. A short sale should be looked at as a helpful tool, not a negative stigma.That is why the government is offering programs that actually pay consumers to participate in short sales. It is not just affecting one community; it is affecting communities and consumers across the nation.

5.) The short sale process is too difficult and they often get denied. Though the short sale process is time consuming; it is not as difficult as the media would have you believe. The problem is that most short sales are denied because of a misunderstanding of the process. It is true that if the short sale process is not followed correctly there is a good chance of getting denied. An experienced agent knows how to avoid this. Short sales require a lot of experience, and a special skill set. If you are looking to go the option of a short sale make sure your agent is skilled and experienced in this area.

6.) Short sales will cost me money out of pocket. A short sale should not cost you any out of pocket money. In fact, you could get between $3000-up to $30,000 to participate in a short sale. In many ways, a short sale may put you in a better financial position than prior to the short sale. Almost every short sale program now has some type of financial incentive for the home owner, as long as it is a principle residence, and we are even seeing relocation money being paid on some investment/second homes. As a seller of a property you should never have to pay for any short sale cost upfront to any professional service. Realtors charge a commission that is paid for by the bank. In most communities there are also non-profits and HUD counselors who can help you with foreclosure prevention options for free. The only potential cost you could incur is if the bank would not release you from a deficiency balance in the short sale, which is happening less and less now.

7.) If I am behind on my payments, I can perform a short sale any time. The farther you get behind on your payments, the harder it is to get a short sale approved. The closer a property gets to a foreclosure the harder it is to convince the bank to perform a short sale. As they get closer to a foreclosure sale more money is spent, thus deterring them from doing a short sale. If you think you need to perform a short sale, time is of the essence; the sooner you start the process, the better. Waiting too long can trigger the ramifications of a foreclosure, losing the ability to do a short sale as a viable option.

8.) I have already been sent a foreclosure notice so I can’t perform a short sale. For the most part just because you received a foreclosure notice or notice of default it does not mean that you do not have time to perform a short sale. The timeline and specifics do vary from state to state, but having done short sales all over the country, I have seen banks postpone a foreclosure to work a short sale option as close as 30 days prior to the scheduled foreclosure auction, but the longer you wait the less chance you have. If you have received a legal foreclosure notice, please reach out to a professional right away. The longer you wait, and the closer you get to foreclosure, the fewer options you have. If you have received a notice to foreclose this means the bank is filing paperwork and starting the process to take legal action to repossess the house. You still have time at this point to prevent foreclosure, but do not hesitate! The closer you get to the foreclosure date the harder it becomes to negotiate with the bank for whichever option you choose.

9.) I was denied for a loan modification, so I know I will get denied for a short sale. Short sales and loan modifications are handled by two separate departments at the bank. These processes are totally different in approval and denial. If you got denied for a modification you can still apply for a short sale; in some cases you can get a short sale approved faster than a loan modification, as some loan modifications are denied because they cannot reduce the loan low enough based on the consumers income.

10.) If I go through a short sale I cannot buy another house for a long time. The time to buy another house depends on your entire credit picture and can vary from 2-3 years. Fannie and Freddie just came out November first and said a homeowner may be eligible two years after a short sale to repurchase. There are even a few FHA programs that allow for a purchase sooner than that, but the guidelines are fairly strict. Some regional and local banks will finance 16-18 months after a short sale, but the interest rate will more than likely be higher than one of the national chains, and this is based on their specific under writing guidelines.

These are just a few of the common myths surrounding short sales and foreclosure. With the options available today, no homeowner should ever have to go through foreclosure, and hopefully this information can help a few more homeowners think twice before walking away from their home not realizing the possible long term ramifications a foreclosure can have.

If you know of homeowners who lost their homes to foreclosure between Jan. 1, 2008, and Dec. 31, 2011, Florida Attorney General Pam Bondi asks that you provide them with this website address – nationalmortgagesettlement.com – and tell them to act now.

Part of the $32 billion national mortgage fraud settlement with Ally/GMAC, Bank of America, Citi, JPMorgan Chase and Wells Fargo included a $1.5 billion fund to compensate borrowers who were foreclosed on after Jan. 1, 2008.

Approximately $170 million is available for cash payments to Florida borrowers. As of last Thursday, 51 percent of eligible homeowners had applied for assistance. Many others have not responded to multiple mailers and live operator calls informing them they may be eligible for modified loans and reduced mortgages.

“This week, I’m going around the state to find these individuals,” Bondi told Realtors attending the Florida Realtors Mid-winter Meetings last week in Orlando. “If I have to, I’ll stand on the steps of every city hall in the state and beg people who deserve their money to come forward.”

Borrowers who submit a claim online will see a deadline notice of Jan. 18, 2013. However a spokesperson for the Attorney General’s office says claims administrators will accept claims forms through Feb. 15, 2013. The form must be filled out completely and properly or the claim will not be paid.

Fannie Mae and Freddie Mac servicers will be able to skip a step when attempting to get a short sale or deed-in-lieu of foreclosure approved.

On Wednesday, the GSEs announced standard delegation agreements were reached with nine mortgage insurers to allow servicers to approve of short sales and deeds-in-lieu without a separate review process with the mortgage insurer. The agreement takes effect November 1 and should speed up the process for the foreclosure alternatives. The short sale or deed-in-lieu still has to meet the GSEs’ requirements, but servicers don’t have to wait for mortgage insurers to offer their stamp of approval.

“Short sales and deeds-in-lieu are important tools to prevent foreclosures and help struggling borrowers,” said Leslie Peeler,SVP of national servicing organization at Fannie Mae. “These delegation agreements create an even more streamlined process that will ultimately help more families avoid the costly effects of foreclosure and benefit taxpayers. We are pleased that the mortgage insurance companies have stepped up to the plate with us to help more homeowners.”

Tracy Mooney, SVP of servicing and REO at Freddie Mac, said, “We applaud the nation’s mortgage insurers for committing to work with us and our servicers to help more borrowers obtain short sales and other foreclosure alternatives.”

The GSEs require mortgage insurance for borrowers who make a downpayment that is less than 20 percent of the property value when taking out a loan.

The announcement adds to Fannie Mae and Freddie Mac’s new standards for short sales, which also take effect November 1. The new guidelines for short sales were adopted to streamline the short sale approval process.

Mortgage giants Fannie Mae and Freddie Mac have issued new rules effective Nov. 1 that will allow short sales for underwater borrowers who have never missed a mortgage payment. Previously, Fannie and Freddie allowed only homeowners who had missed payments to qualify for a short sale.

However, eligible short-sale owners will need to show a hardship to qualify for a short sale under the new rules. Hardships may include unemployment or the death of a spouse.

The new rules won’t help credit scores, however. The non-delinquent short sellers will likely take just as big a hit to their credit score as delinquent homeowners who have missed loan payments and gone into foreclosure, according to Kenneth Harney, writing in Inman News.

“Under current national credit reporting practices, those non-delinquent borrowers are likely to be treated the same for credit scoring purposes as severely delinquent owners who go to foreclosure after months of nonpayment, or who simply toss back the house keys and walk away in strategic defaults,” says Harney.

Credit agencies have no special coding that indicates a short sale occurred without an accompanying delinquency. Therefore, homeowners could see their credit scores drop 150 points or more after a short sale.

However, officials at the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, say they are “in discussions with the credit industry” to explore ways to fix the credit score problem for people who haven’t missed a payment before undergoing a short sale.Source: “Damage to Credit Scores Could Trip Up New Fannie, Freddie Short Sale Program,” Inman News as cited on FloridaRealtors.org

With the number of short sales increasing and even outnumbering REO sales in certain states, experts are speculating short sales might become key to preventing an even greater swelling of foreclosed properties on the market.

Compared to a year ago in January 2012, pre-foreclosure sales, which are typically short sales, increased 33 percent, according to a RealtyTrac report released Thursday.

Short sales even outpaced bank-owned REO sales in 12 states, including Utah, California, Arizona, Florida, Indiana, Colorado, New York and New Jersey.

Despite the increase, Daren Blomquist, VP of RealtyTrac and author of the report, points out that short sales have declined on a long-term basis, but January’s report could signal a turning point.

“Short sales have long held great promise as a market-based solution to the nation’s foreclosure problem, but short sales transactions over the past three years have actually declined after peaking in the first quarter of 2009,” said Blomquist. “January foreclosure sales numbers, along with first quarter foreclosure activity, strongly indicate that downward trend is ending, and we believe 2012 could be a record year for short sales.”

Average pre-foreclosure prices saw a decline, according to the report, with the average sales price in January at $174,120, down 10 percent from January 2011. This, RealtyTrac stated, shows that lenders are more willing to approve more aggressively priced short sales.

In January, a home sold via short sale sold at a 21 percent discount on average compared to the average price of a home not in foreclosure, according to RealtyTrac.

The five states with the biggest discounts were Massachusetts (40.86 percent), Missouri (35.5 percent) California (29.93), Indiana (29.82), and Georgia (29.31).

The time it took to approve of a short sale was a bit lower for the 2012 first quarter, averaging 306 days, down from 308 days in the fourth quarter of 2011 and down from a peak of 318 days in the third quarter of 2011. The short sale timeline begins when a property starts the foreclosure process to when it’s sold as a pre-foreclosure.

However, the average time to sell a pre-foreclosure has actually tripled since the first quarter of 2007, when it took an average of 113 days.

Recently, Bank of America and GSEs Fannie Mae and Freddie Mac announced efforts to streamline the short sale process. BofA’s change requires a decision on a short sale in less than 3 weeks.

Starting in June, the GSEs are requiring servicers to make a decision on a short sale within 30 days of receiving an offer or an application package from a borrower; if more time is needed, a servicer must provide the borrower with a weekly update and come to a decision no later than 60 days.

With foreclosure starts – either default notices or scheduled foreclosure auctions – numbering more than 100,000 in March, this means more opportunities for short sales, according to the report.

Compared to the month before, March foreclosure starts increased 7 percent, but were down 11 percent from a year ago. When looking at individual states, 31 posted monthly gains in foreclosure starts in March.

Other properties with potential to become short sales are delinquent loans, which represented approximately 3.5 million properties, according to a fourth quarter 2011 survey from the Mortgage Bankers Association.

RealtyTrac is an online marketplace of foreclosure properties, with more than 1.3 million default, auction and bank-owned listings from over 2,200 U.S. counties, along with detailed property, loan and home sales data.

Bank of America is making changes to its short sale procedures and introducing an improved task flow within the short sale technology module from Equator, BofA’s short sale management platform of choice. The goal: to reduce the timeframe for a short sale decision to less than three weeks.

Starting Saturday, April 14, real estate professionals working with BofA will be required to submit five documents for short sales initiated with an offer:

The acknowledgement and disclosure form, short sale addendum, and the form for third-party authorization are available through the company’s online Agent Resource Center.

The third-party authorization form is a new standardized document developed specifically for BofA. Previously, the lender accepted third-party authorization forms in differing formats and from a variety of sources when transacting a short sale.

Bank of America says it recognized a need for greater compliance and consistency with this important document and has now created its own form to standardize the third-party authorization process. The two-page document

The bank’s new short sale process will enable real estate agents, brokers, attorneys, and other short sale specialists involved in pre-foreclosure transactions to complete tasks such as document collection, valuations, and underwriting simultaneously.

With these steps running concurrently, the timeline from initiation to closing is reduced. In fact, Bank of America says it will now be able to provide a decision on a short sale offer in 20 days. Typically, BofA’s short sale process has taken anywhere from 45 days upwards.

In continuing to streamline the decision process, should the buyer walk away from the sale, Bank of America is giving agents five days to submit a backup offer. Previously, the backup offer window was 14 days. Interested buyers are limited to two counteroffers and will receive a response from the lender within three days.

BofA notes that all email messaging between designated selling agents and their Bank of America short sale specialist will continue to occur within the Equator system. Agents will receive a standard notice via email to log into the system and retrieve their messages.

In order to implement the myriad of changes, BofA’s Equator platform will be down for 10-12 hours the night of Friday, April 13 into the early morning of Saturday, April 14.

Real estate agents and other short sale professionals are invited to review a Bank of America webinar outlining the coming changes. BofA is also offering task-by-task training on the new Equator process via a webinar to be aired on Thursday, April 19 from 4-5 p.m. (EST). Additional information can be found through the company’s online Agent Resource Center.

Bank of America’s short sale and REO executive Bob Hora says the company expects short sales to continue to increase and is taking steps to ensure it is providing decisions quickly and real estate agents are alerted of status as soon as possible.

The real estate professionals at Massachusetts-based McGeough Lamacchia Realty have been proponents of short sales for quite some time, insisting that everyone comes out ahead when a short sale is achieved as opposed to a foreclosure. Now they’re sharing the facts that back up their claim.

On average a home sold through short sale brings a 24 percent greater return than a foreclosed property, according to recent findings from McGeough Lamacchia Realty.

“This means the banks are losing an average of $43,000 for every foreclosure sale compared to what they would have made in a short sale,” said a blog post on the company’s website.

The firm reviewed prices for short sale and foreclosure sale properties in 2010 and 2011 in Boston, Phoenix, Tuscon, Southern California, and Southwest Florida.

While banks often offer incentives to homeowners who pursue a short sale, “more needs to be done to promote short sales,” McGeough Lamacchia said.

Specifically, the firm points out that Fannie Mae and Freddie Mac are not offering the cash incentives for short sales that are now standard through the Home Affordable Foreclosure Alternatives program.

“Fannie Mae and Freddie Mac need to do more to promote short sales and make it easier for distressed homeowners to do a short sale and avoid foreclosure,” McGeough Lamacchia said in their blog post.